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COMMONWEALTH OF KENTUCKY

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COMMONWEALTH OF KENTUCKY ...

    COMMONWEALTH OF KENTUCKY

    BEFORE THE PUBLIC SERVICE COMMISSION

In the Matter of:

    THE APPLICATION OF MOCKINGBIRD VALLEY )

    SANITATION, INC. FOR AN ADJUSTMENT OF ) CASE NO. 98-560

    RATES PURSUANT TO THE ALTERNATIVE RATE )

    PROCEDURE FOR SMALL UTILITIES )

    O R D E R

    Mockingbird Valley Sanitation, Inc. (“Mockingbird Valley”) having applied for a

    rate adjustment, and Commission Staff having performed a limited review of

    Mockingbird Valley’s operations and having prepared a report of its findings and

    recommendations,

    IT IS THEREFORE ORDERED that:

    1. The report of Commission Staff, appended hereto, is made a part of the

    record of this proceeding.

    2. Within 14 days of the date of this Order, all parties shall carefully review

    the report and submit to the Commission their written comments on the report. In these

    comments, each party shall specifically identify those findings and/or recommendations

    to which it objects.

    3. Within 14 days of the date of this Order, any party wishing an informal

    conference in this matter to discuss the report shall submit to the Commission a written

    request for such conference. In its request, the requesting party shall identify all issues

    that it wishes to address at the requested conference.

    4. Within 14 days of the date of this Order, any party wishing a hearing in this matter shall submit to the Commission a written request for such hearing. In its request,

    the requesting party shall identify all issues that it wishes to present at hearing.

    5. Unless a party submits written objections to the Commission Staff report within 14 days of the date of this Order, it shall be considered as agreeing with the

    report’s findings and recommendations and waiving its right to object to those findings

    and recommendations.

    6. If no objections to the Commission Staff report or requests for informal conference or hearing are received within 14 days of the date of this Order, this matter

    th of July, 1999. shall stand submitted to the Commission for decision.

     By the Commission Done at Frankfort, Kentucky, this 29

ATTEST:

____________________

    Executive Director

    COMMONWEALTH OF KENTUCKY

    BEFORE THE PUBLIC SERVICE COMMISSION

In the Matter of:

    APPLICATION OF MOCKINGBIRD VALLEY )

    SANITATION, INC. FOR AN ADJUSTMENT OF )

    RATES PURSUANT TO THE ALTERNATIVE RATE ) CASE NO. 98-560

    PROCEDURE FOR SMALL UTILITIES )

    STAFF REPORT

     Prepared By: John D. Williams

     Public Utility Financial

     Analyst, Senior

     Water and Sewer Revenue

     Requirements Branch

     Division of Financial Analysis

     Prepared By: Renee Curry

     Public Utility Rate

     Analyst, Senior

    Communications, Water and

    Sewer Rate Design Branch

     Division of Financial Analysis

    STAFF REPORT

    ON

    MOCKINGBIRD VALLEY SANITATION, INC.

    CASE NO. 98-560

A. Preface

     On November 5, 1998, Mockingbird Valley Sanitation, Inc. (“Mockingbird”),

    applied for an adjustment of its rates for sewage treatment service pursuant to 807 KAR

    5:076. Due to deficiencies, its application was not accepted for filing until December 9,

    1998. Mockingbird requested a 41.8 percent increase in its sewage treatment service

    rates, which will generate additional revenues of $8,435.

    Mockingbird requested assistance from Commission Staff (“Staff”) in the

    preparation of its Alternative Rate Filing (“ARF”) application as allowed pursuant to 807

    KAR 5:076, Section 2. To assist in the preparation of this application, Staff performed a

    limited financial review of Mockingbird’s operations for the 1997 calendar year.

    John Williams of the Commission’s Water and Sewer Revenue Requirements

    Branch performed the limited review on May 21, 1998. Mr. Williams is responsible for

    the preparation of this Staff Report, except for the determination of normalized operating

    revenue and Attachment D, which was prepared by Renee Curry of the Commission’s

    Communications, Water and Sewer Rate Design Branch.

    A comparison of Mockingbird’s actual and requested operations is shown in

    Attachment A. Based on Staff’s recommendations, Mockingbird’s operating statement

    would appear as set forth in Attachment B. Attachment C shows Staff’s recommended

revenue requirement calculation. Staff’s recommendation provides for a revenue

    requirement of $25,033 or an increase in revenues of $4,864.

    Staff’s recommended rate in Attachment D will generate the required revenue

    from rates of $25,033.

     Scope

    The scope of the review was limited to obtaining information as to whether the

    test period operating revenues and expenses were representative of normal operations.

    Insignificant or immaterial discrepancies were not pursued and are not addressed

    herein.

    B. Analysis of Operating Revenues and Expenses

     Operating Revenues

     Mockingbird reported operating revenue of $18,241 in its 1997 annual report to

    the Commission. Based on the end-of-period customer level, including free service to

    the utility’s owner and son, granted by the Commission in Mockingbird’s last rate case,1

    and the utility’s current rate, the normalized revenue from rates would be $20,169 (45

    customers x $37.35 x 12 months). Therefore, Staff recommends that operating revenue

    be increased by $1,928.

     Operating Expenses

     In its application, Mockingbird reported actual and requested test period

    operating expenses of $16,959 and $24,507, respectively. The following are Staff’s

    1 Case No. 94-034, The Application of Mockingbird Valley Sanitation, Inc. for a

    Rate Adjustment Pursuant to the Alternative Rate Filing Procedure for Small Utilities,

    Final Order Dated August 5, 1994. -2-

recommended adjustments to Mockingbird’s actual test period operations and

    discussion of Mockingbird’s proposed adjustments:

     Owner/Manager Fee:

     In its application, Mockingbird requested $3,600 for owner/manager fees, an

    increase of $2,300 from the amount Mockingbird reported in the test period to the

    Commission in its annual report of $1,300. Included in that amount were payments to

    owner/manager Myra Schureck of $1,000 and the utility’s CPA fee of $300 misposted to

    this account. The Commission has allowed sewer utilities of Mockingbird’s size $3,600

    annually, which is reasonable in this instance. Staff recommends that test period

    operations be increased by $2,300 to reflect an annual owner/manager fee of $3,600.

     Sludge Hauling:

     During the test period Mockingbird paid one sludge hauling fee in the amount of

    $396, but misposted this amount as routine maintenance fee on its 1997 annual report

    to the Commission. Based on the utility plant operator’s recommendation, the age of

    the plant requires that the sludge hauling be increased to six 5,000-gallon loads

    annually. The Commission’s engineering division cited the utility for needing the

    digestor cleaned of sludge in the 1998 inspection. However, considering that there was

    only one load of sludge hauled in 1997, Staff has used the average of the loads hauled

    in years since the last rate case, combined with the operator’s recommended number of

    loads to arrive at a pro forma level of expense. The five-year average calculated is 3

    loads annually. Based on the most recent cost quotes for sludge hauling, the pro forma

    sludge hauling expense would be $1,248 ($416.15 x 3 loads). Therefore, Staff

    -3-

recommends that test period operations be increased by $1,248 to reflect annual sludge

    hauling fees of $1,248.

     Routine Maintenance Fee:

     Mockingbird requested a routine maintenance fee of $3,630, a decrease of

    ($3,313) from the total reported in its 1997 annual report to the Commission of $6,943.

    The basis for this annual expense is a 10 percent increase in the monthly service fee

    charged by the utility’s contract plant operator, from $275 monthly, to $302.50 monthly

    ($302.50 x 12 = $3,630). The operator has not increased the monthly service fee since

    1994. Commission Staff finds that based upon its knowledge of comparable sewer

    utilities, the requested monthly fee of $302.50 is within a reasonable range and

    therefore, it should be reflected in recommended operations.

     During Staff’s field review, items were noted that should have been separately

    stated as different operating expenses, rather than grouped together with routine

    maintenance fees, account 710-A according to the Uniform System of Accounts

    (“USOA”). These operating expenses are as follows:

     Effluent testing fees $1,755

     Mowing fees 650

     Repairs to maintain treatment

     and disposal plant 842

     Sludge hauling 396

     Pro Forma Adjustments to Reclassify

     from Routine Maintenance Fees $3,643

     Considering the above mentioned increase in monthly service fees and the pro

    forma reclassifications, Staff recommends that routine maintenance fees be reduced by

    ($3,313) to an adjusted balance of $3,630 annually.

    -4-

    Maintenance of Treatment & Disposal Plant:

     General repairs to treatment and disposal plant misclassified in the 1997 annual

    report to the Commission as routine maintenance fees totaling $842 have been

    reclassified to properly show the expenditures in account 714 of the USOA. Therefore,

    Staff recommends test period operations be increased by $842 to reflect this amount as

    maintenance of treatment and disposal plant.

     Maintenance Other Mowing Fees:

     Other maintenance for mowing fees misclassified in the 1997 annual report to the

    Commission as routine maintenance fees totaling $650 have been reclassified to

    properly show the expenditures in account 715 of the USOA. Therefore, Staff

    recommends test period operations be increased by $650 to reflect this amount as

    maintenance other mowing fees.

     Billing and Collection Fees:

    Mockingbird’s customer billing and collection is performed by the Oldham County

    Water District at a fee of $2 per customer bill. This fee combined with the number of

    test period customers results in Mockingbird’s recommended billing and collection fee

    expense of $1,032.

    Mockingbird’s test period operating revenues were reported on the annual report

    to the Commission net of billing and collection expense. Since the operating revenues

    recommended herein reflect the gross billings, Staff recommends that test period

    operations be increased by billing and collection expenses in the amount of $1,032.

    -5-

    Outside Services Accounting:

     As explained in the section on “owner/manager fee”, Mockingbird’s annual fee for

    preparing its income tax returns and annual report to the Commission was included in

    the wrong account on the 1997 annual report to the Commission. Additionally, Staff

    believes the utility is entitled to a reasonable fee for outside services for the preparation

    of an annual general ledger and financial statement, from which tax returns and the

    annual report to the Commission may be generated. Staff considers $350 a reasonable

    amount for general ledger and financial statement preparation, based upon its

    knowledge of other comparable sewer utilities. Staff considers $300 a reasonable

    amount for tax return and annual report preparation, based upon its knowledge of other

    comparable sewer utilities. Therefore, Staff recommends increased test period

    operations of $650 for reclassifying and adjusting the amount of expense for outside

    services accounting, which results in a pro forma adjustment and annual expense of

    $650.

    Outside Services Kentucky Pollutant Discharge Elimination System (“KPDES”)

    Testing:

     Mockingbird requested outside services KPDES testing fees totaling $1,620

    annually, or $135 per month. Mockingbird paid $1,755 as noted in the section on

    “routine maintenance fee,” for 13 months testing in 1997, but only 12 months

    expenditures are permitted in Staff recommended operations. The operating permit

    with the State requires monthly effluent tests by Mockingbird.

    Therefore, Staff recommends increased test period operations for outside

    services KPDES testing in the amount of $1,620.

    -6-

    Depreciation:

     Mockingbird requested depreciation expense of $4,969, a $353 increase over the

    amount reported on the 1997 annual report to the Commission. Mockingbird included

    adjustments for depreciable assets recommended as necessary by its plant operator.

    Based on Staff’s experience with treatment plants of Mockingbird’s age, Staff accepts

    these proposed replacements and betterments to the plant.

     Based upon Mockingbird’s past filings with the Commission, Staff recommends

    2 stated “[t]hat the Applicant [Mockingbird] will finance the denial of the allowance for depreciation expense on initial utility plant expenditures. The

    project cost of approximately $164,675 through a development loan and plans to Commission in Case No. 7001

    recover all associated construction and installation costs of the sewer collection system

    through the sale of residential lots within the subdivision.”

     In its final Order in Case No. 7001,3 the Commission held that “it is common for a

    builder or developer to construct water and sewage facilities that add to the value and

    salability of his subdivision lots and to expense this investment cost in the sale price of

    these lots or, as an alternative to donate these facilities to a utility company.” The

    Commission determined “that to permit the accumulation of a depreciation reserve on

    2 Case No. 7001, The Application of Mockingbird Valley Sanitation, Inc., a

    Kentucky Corporation, for an Order Pursuant to Chapter 278 of the Kentucky Revised

    Statutes for a Certificate of Public Convenience and Necessity Authorizing and

    Permitting Said Applicant to Construct a Waste Water Collection and Treatment System

    to Serve the Residents of Mockingbird Valley Subdivision in Oldham County, Kentucky,

    (April 19, 1978) at 2.

    3 Case No. 7001, Order dated June 5, 1978 at 3.

    -7-

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